Editor's note: Technology is developing at an unprecedented rate.
And it's creating the chance to make huge, fast gains in the market.
In today's Masters Series essay – excerpted from an Exponential Tech Investor special report – editor Jeff Brown shares the two underlying trends that are changing the world today... and explains why it's creating the most exciting investment opportunity of our lifetimes...
Get Ready for the Coming Wave of Tech IPOs
A new wave of technologies is about to change the world.
As investors, it's a window of opportunity we're unlikely to see again in our lifetimes... the kind that leads to extraordinary profits.
Investing in up-and-coming technologies, or growth stocks, might seem counterintuitive today. Government debts are at record highs. The Federal Reserve, the European Central Bank, and the Bank of Japan are all printing ridiculous amounts of money. Economic growth is weak the world over.
But few people understand two underlying trends...
The first is the accelerating rate of technological change, propelled by the impact of "exponential technologies." Artificial intelligence ("AI"), robotics, network sensors, synthetic biology, 3D printing – these technologies are all advancing at exponential rates.
At the core of exponential technologies is the microprocessor, the "brain" of any computing device. For the last 45 years, the power of these microprocessors has been doubling every 18 to 24 months. As a result, we have progressed from the most basic forms of computing (like addition and subtraction) to completing complex algorithms at speeds far faster than the human brain.
At the same time, the costs for this processing power have been dropping exponentially. Computing power that used to cost tens or hundreds of millions of dollars now costs less than $1,000 and is accessible to the average consumer.
Today's average smartphone is more than 32,000 times more powerful than all of the computing power used for the Apollo missions to send astronauts to the moon. And it fits in your pocket.
Some of today's cars are "smart" enough to almost drive by themselves. In just a few years, millions of self-driving cars will be shuttling people around more safely, more efficiently, and more cost-effectively than any human driver could.
Artificial intelligence capabilities are also improving by the day. Tesla cars, for example, use AI for their self-driving technologies. This allows the cars to learn, improve, and deploy their new skills via automatic software downloads to the fleet of Tesla vehicles. Every iteration delivers more safety to Tesla's customers. The company collects data from a million consumer miles... every 10 hours!
The laws of accelerating returns and exponential growth are firmly entrenched and will impact every aspect of our lives.
Consider this...
Over the last few decades, it took the average Fortune 500 company almost 20 years to reach a $1 billion market capitalization. Compare that to social-media giant Facebook (FB), which reached a $1 billion market cap in a little more than five years. Today, Facebook has a $321 billion market cap. It took in $18 billion in revenue over the past 12 months alone.
Online-transportation company Uber hit a market cap of $1 billion in about three years. Uber is still private, but it's estimated to reach $26 billion in gross bookings this year.
Slack, a workplace-productivity software platform, reached a $1 billion valuation in a mere eight months. (It, too, is a private company.)
How is this possible?
In short, it is simply easier, cheaper, and faster than ever before for companies with a fantastic product or service to bring it to market. Cheap computing power, simple-to-use development tools, Internet infrastructure, and more than 3 billion smartphones deployed around the world all contribute to this acceleration in innovation.
These are all very real businesses generating extraordinary revenues, thanks to exponential technologies.
Another contributing factor is the rate of technology adoption. When the first personal computers came out 25 years ago, the cost was prohibitive – from $3,000 to $5,000 (in 1990 dollars). Today, you can buy the latest technology for less than $1,000. And many services provided via smartphone applications are often offered for free (at least, initially). Dramatically improved distribution platforms, highly automated manufacturing, and affordability have been catalysts for more rapid technology adoption.
The chart below shows the time it took for certain technologies to reach widespread adoption...
It took the telephone about 60 years to reach a 75% adoption rate. Electricity took about 35 years. The radio and color television took about 20 years. The cellphone and the Internet reached 75% adoption in only about 15 years.
The adoption time will become even shorter with new technologies. The positive impact on society will be faster... And the profits made from investing in the right technology companies will be greater than ever before.
Thanks to this acceleration in innovation, the average company lifespan on the S&P 500 index is plummeting.
Back in the 1960s, the average company remained on the S&P 500 index for 60 years. By 1980, the average had dropped to about 35 years. By 1990, less than 20 years. And by 2010, it had dropped all the way down to about 15 years. Current projections for 2030 are even less than that.
This is because most leading-edge technological development is happening in private, venture-capital-backed companies, not the ones that have been around for the last 30 years. Slow-moving, incumbent companies find themselves out of business (like Kodak) or having to sell themselves to another large company before they die naturally (like AOL).
Exponential technologies, coupled with exponentially decreasing costs to use those technologies, have created the perfect environment for rapid innovation.
Just 16 years ago, it cost $5 million to launch an Internet-technology company and bring a product to market. It was even more for those that made computer hardware (like semiconductors) – typically $15 million to $20 million.
However, with the development of free, easy-to-use development tools and cheap, ubiquitous computer-processing resources, you can launch a company and a product today for a mere $5,000.
That leads me to the second underlying trend that few people recognize...
Over the last five years, the financing of technology companies has changed dramatically. Fairly modest sums of capital can now create billion-dollar companies.
Back in the late 1990s or early 2000s, if a private technology company had $20 million to $50 million in revenues and was generating free cash flow (i.e., its cash balance was growing, not shrinking), it was time to go public. By selling shares via an initial public offering (IPO), companies received the capital they needed to reach the next stage of growth.
Today, more and more technology companies are using angel investors (funds from private individuals) and venture capital (VC) dollars (funds from private investment groups) to bring their products to market. They are able to fund research, development, and revenue growth without the scrutiny and expense of being a publicly traded company.
Venture-capital financing in the U.S. has been on a strong uptrend over the last 10 years. The graphic below shows $77 billion in VC financing in 2015... the highest level of funding in the last decade. That's a 13% increase over 2014, and about double the level invested in 2012.
It is also important to note that while the amount of VC capital is increasing, the number of deals is decreasing... indicating a larger number of large deals. 2015 had only about 86% of the deals closed in 2014.
For the past five years or so, large banks, hedge funds, and other institutions – such as mutual funds, family offices, and asset managers – have been allocating larger percentages of their investment portfolios to private companies, primarily technology companies with the potential for exponential returns. Hundreds of billions, in fact, have flowed into venture-capital-backed firms.
In 2009, the investments by non-VC entities were mostly in the single digits. By 2015, the number of investments being made by these entities went through the roof...
- By a factor of 15 for hedge funds.
- By a factor of 11 for mutual funds.
- By a factor of 30 for family offices.
- By a factor of eight for asset management firms.
In fact, by September of 2015, 78% of the billion-plus financings were led by non-VCs, up from 60% a year before.
With so much money at play from non-VC sources, it was necessary for VC firms to invest in larger and larger private deals. Each deal takes a lot of effort. For example, if a fund has $1 billion to invest in a given year, will it do 100 deals of $10 million, or 10 deals of $100 million? The answer is that it tends to gravitate toward a smaller number of larger deals.
This explains financing deals like Uber. In August 2015, the company received $1.2 billion from several Chinese companies. Uber was valued at around $50 billion at the time. It has since raised funds with a valuation of $62.5 billion.
The private financing of technology companies has caused the entire technology IPO market to dry up over the last few years.
In 2015, only 24 technology companies went public, representing only 14% of the total IPOs for the entire year. These are the lowest levels seen since the 2008-2009 financial crisis. In 2007, pre-crisis, 60 tech companies went public, responsible for 28% of total funds raised in the public markets.
New companies with fantastic, leading-edge technologies have been able to raise private capital in the hundreds of millions or even billions... giving them time to develop their products and business models before going public.
And this dynamic – the ability to stay in the private sector longer – is creating the most exciting investment opportunity of our lifetimes.
Tomorrow, I'll tell you exactly how to benefit from the backlog of IPOs...
Regards,
Jeff Brown
Editor's note: At the Stansberry Alliance Meeting in Las Vegas, Jeff laid out an "insider's guide" to the secrets of the IPO market... and shared the name of a recent IPO that could be the next big winner. It would normally cost you $15,000 and an Alliance membership to have access to this video. But for an extremely limited time, you can view this FREE presentation, which includes the name of the company, by clicking here. But don't wait too long... This offer expires on Monday at midnight.